Insiders can use tricky shadow trading to conduct illegal deals unnoticed by authorities. In doing so, they use popular investment products.
Insider trading and market abuse have long ceased to be trivial offenses. After insider trading rules were tightened in Switzerland in 2013, there have been numerous supervisory and criminal rulings as well as judgments.
The Swiss Financial Market Supervisory Authority (Finma) in particular has intensified its efforts by cooperating more closely with international supervisory authorities. In addition, more indications of possible insider trading are coming from domestic banks and securities dealers.
Inventive Insiders
Despite increased efforts to combat it, not all insider traders are deterred by ever more attentive authorities. On the contrary, the rush of criminal activity can even spur them to become more inventive.
Scientists from institutions in Sweden and Australia have discovered a new form of insider trading. In their study, they conclude that insider trading is more widespread than just the direct forms that have been the focus of research and law enforcement to date.
Tip of the Iceberg
According to the study, insider traders are using exchange-traded funds to conceal billions of dollars worth of trades. According to the analysis, anomalous trades worth at least $2.75 billion in US-listed exchange-traded funds (ETFs) came to light between 2009 and 2021, before the announcement of mergers and acquisitions.
As the authors suggest in the «Financial Times» (behind paywall), tighter regulatory controls enticed people with inside information to engage in a type of evasion trading. Insiders don't buy stocks or options from a company about which they have non-public information about a merger, for example. Instead, they trade in an exchange-traded fund, usually an industry fund, in which the company is represented.
Blurred Tracks
For insiders, one advantage of such «shadow trading» is that participation through an ETF is more inconspicuous than trading directly in the company's stock.
Moreover, the ETF can be more liquid than the underlying shares, helping insider traders hide what they are up to and diverting the attention of law enforcement.
Invisible Enemy?
In the last two years of the study period, 2020 and 2021, there was little evidence of such insider transactions. Reportedly, the Insider Trading Prohibition Act, passed during this period, may have acted as a deterrent.
Researchers do not rule out the possibility that, because of the sharp increase in ETF trading since 2020, the volume of shadow trading is too small to be considered statistically meaningful. So authorities can't be at all sure they're in the dark and have to be prepared to solve a new mystery.
Swiss Exchange Prometheus
The Swiss stock exchange, meanwhile, seems to be one step ahead. Since September 2020, the application «Prometheus» has been tracking down suspicious transactions. As the Swiss stock exchange regulator SIX Exchange Regulation announced in response to a query from finews.com, the trading surveillance unit uses it to monitor all stock exchange transactions executed on SIX Group's trading venues, including ETF transactions.
